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jabil circuit Annual Report 2006


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jabil circuit Annual Report 2006

  1. 1. SYNCHRONIZED SOLUTIONS 2006 annual rep o rt
  2. 2. table of Contents Letter to Shareholders ........................................................ 8 Financial Highlights .......................................................... 10 Board Of Directors ........................................................... 12 Corporate Governance & Financial Responsibility .................................................... 13 Shareholder Information .................................................. 13 Annual Report on Form 10-K Business ..................................................................... 4 Selected Financial Data ............................................. 39 anagement’s Discussion and Analysis M of Financial Condition and Results of Operations ........................................................... 44 . anagement’s Report on Internal M Control Over Financial Reporting ............................... 98 eport of Independent Registered R Public Accounting Firm ............................................. 99 . Consolidated Balance Sheets .................................. 102 Consolidated Statements of Earnings ...................... 103 onsolidated Statements of C This Annual Report contains forward-looking statements Stockholder’s Equity ................................................ 105 (within the meaning of the federal securities laws). Please see Consolidated Statements of Cash Flows .................. 106 Part I, Item I of the Form 10-K included herein for additional Notes to Consolidated Financial Statements ............ 107 information regarding forward-looking statements.
  3. 3. JabIl mIssIon: JabIl mIssIon: solvIng global Challenges & maIntaInIng top performanCe Relationships between Jabil and its customers have evolved into long-standing partnerships that span entire product life cycles. Jabil endeavors to achieve excellence from beginning to end - including design, manufacturing, product assembly and after-market services such as product repair and warranty. With a strong supply-chain management system, tied together with an unrivaled information technology infrastructure, Jabil operates on a global basis, 24 hours-a-day, seven days-a-week. Today’s partnerships are information-intensive and intricately link Jabil and its customers. Successful partnerships flourish in an environment based on mutual trust and cooperation. The centerpiece of Jabil’s unique manufacturing model is the dedicated business unit. With this model Jabil offers customers dedicated and accountable human resources; responsive and scalable performance; and synchronous global product solutions. And, the Jabil approach provides customers a customized solution that is right for each customers’ individual products and particular needs. Due in large part to the clarity and functionality of Jabil’s dedicated business unit model, the company’s operational and financial performance over the past decade has been among the most successful of publicly-held companies. Jabil has posted 30 percent or better Compound Annual Growth Rate (CAGR) in revenues, operating income and EPS over the past 12 years. During the same time period only four companies on the 2007 Fortune 500 list have also grown 30 percent or better CAGR for revenues, operating income and EPS. To maintain top performance and to meet future financial and operational goals, Jabil will remain focused on its core strategy: an unwavering focus on profitable growth and diversification in multiple business sectors utilizing Jabil’s business unit model and a dedication to developing individualized sector-specific supply chain solutions for each customer. The company’s financial goal is to continue to attain balanced growth of revenue, operating income and earnings and to deliver this growth with strong free cash flow, while at the same time maintaining a flexible, adaptable model to serve the global market. 1
  4. 4. Customer perspectives “Our business runs quite a bit more efficiently by having partnered with Jabil. We have leveraged all their manufacturing expertise, their worldwide purchasing power, their cost of components and their technology roadmap. In moving from the small contract manufacturer to Jabil, we did a lot of growing up as a company. And that’s one of the values that Jabil added. They helped us become a better company.” “The thing that I have been particularly pleased with Jabil is that ability to deal with problems real time and this is at all levels of the organization. The other true thing we value about Jabil is the knowledge and expertise that they bring.” 2
  5. 5. strategIC JabIl aDvantage: DIversIfIeD groWth Over the last decade Jabil’s growth and diversification have been driven in part by the strong trend for companies to outsource their manufacturing operations to service providers such as Jabil. Through the years electronic product companies in various business sectors have tested, expanded and wholeheartedly adopted a manufacturing outsourcing strategy. Diversified growth has been a powerful driver in the overall success of Jabil. Over the last three decades Jabil has seen growth primarily from product companies’ adoption of an outsourcing strategy. In some cases diversification was accelerated by external forces or thoughtful, strategic moves made by Jabil. In numerous instances Jabil intentionally entered new markets after careful deliberation and sought specific advantageous acquisitions. In 2002, Jabil entered the consumer electronics sector in a major way with the acquisition of a significant portion of Royal Philips Electronics’ consumer manufacturing business. While perceived by some to be a departure from the company’s historical strategy, Jabil deliberately chose to evolve and expand into this key opportunity for the company. Consumer electronics now comprises over a third of Jabil’s total business. It has also been among the company’s fastest growth opportunities. Similarly, Jabil obtained incremental expertise in the rapidly growing instrumentation and medical sector through the acquisition of Varian, Inc.’s electronic manufacturing services business in 2005. Jabil moved strategically to further penetrate a desirable and budding medical and instrumentation sector. Jabil now possesses a leadership position in this pivotal, high value-add manufacturing business and garners over 15 percent of its annual revenue from this sector. A focus on diversification continues to drive business development decisions at Jabil. As the trend to outsource continues to evolve and blossom, Jabil stands ready to meet those demands. 3
  6. 6. Customer perspectives “One of the things that Jabil provides us with is an account manager that is fully knowledgeable about our company and about our product set. And I mean from beginning to end. I can make one phone call and get an understanding on our status. That’s focused service. That’s someone you can count on.” ”The core of our success with Jabil has been and continues to be dedication and the focus of the people in the workcell and the outstanding customer service that they continue to provide.” “We’ve emulated their workcell structure, so we have people here that are direct connects with all their people. We’ve found it works better if everyone knows the name of the person that is their partner across the relationship.”
  7. 7. strategIC JabIl aDvantage: DeDICateD busIness unIts Jabil’s internally developed dedicated business unit model fosters strong relationships from the outset with customer-dedicated teams. Each business unit functions as an extension of the customer and is custom fit to the customer’s specific manufacturing needs with a team of engineers, materials planning, procurement and supply chain managers. Headed by a Business Unit Director, the team is wholly responsible for satisfying the manufacturing production needs of the customer’s individual products while meeting the financial objectives of Jabil. Strong peer-to-peer contact enables the constant exchange of information between Jabil and its customers. This interaction ultimately provides Jabil the means and the insight to proactively identify ongoing process improvements. Throughout the relationship Jabil focuses on fulfilling the customer’s current and future needs. Adapting swiftly to rapidly changing manufacturing requirements, Jabil business units have full authority to make most decisions about pricing, location, business plans and investments for their business unit. Customer satisfaction scores and profitability metrics measure the success of each Jabil business unit. Business Unit Directors are held accountable for both customer satisfaction and meeting Jabil’s internal performance benchmarks. Customers are continually searching for ways to deliver better products at more cost-competitive prices. To meet these needs, business unit teams at Jabil draw upon the expertise of Jabil’s worldwide product supply chain, logistics and manufacturing experts to determine manufacturing sites that will accommodate the changing demands of a competitive global environment. Jabil’s dedicated workcell business unit, combined with strategically located global operations, provides the flexibility to grow while shifting customer business geographically to benefit both the customer and Jabil. Dedicated and accountable, Jabil’s business unit model enjoys an enviable competitive advantage in the global marketplace.
  8. 8. Customer perspectives “The manufacturing site may be halfway around the world but we’re in a 24/7 business. Velocity communication means a lot. We can’t wait. Our customers are demanding product the day after tomorrow so we need answers and we need answers quick. And I think I get that from Jabil’s account manager.” “I have to have an agile supply chain that can make changes. Having an agile supply chain means that you have service providers that are willing to make that significant change as fast as they possibly can. That’s one of the things that Jabil brings to the party.”
  9. 9. strategIC JabIl aDvantage: seCtor-speCIfIC solutIons Jabil’s supply chain solutions provide significant financial flexibility and selective sourcing alternatives for our global customers. The backbone of Jabil’s virtual supply chain solution is the unified enterprise resource planning system employed in all plants worldwide. Tracking over 800,000 sku’s (stock keeping units) from over 6,000 suppliers, Jabil’s integrated open architecture affords access and visibility. This multi-faceted external base of strategic partners allows Jabil to tailor solutions for each customer and business sector with the right suppliers offering the best value in each geographic region. The successful diversification in Jabil’s business operations has necessitated supply chain simplification with sector-based strategies banded together with real-time information systems. In order to sustain growth while continuing to diversify, Jabil continues to provide best-in-class supply chain solutions for divergent industry sectors with vastly differing needs. Today, service offerings are expanding as production continues to globalize and cluster in low-cost geographies. Jabil is simplifying the supply chain through the development of sector-specific optimization and by making strategic investments in key areas of the supply chain to satisfy both customer and company objectives. These investments provide incremental skills to more effectively manage the virtual supply base; significantly simplified logistics or reduced lead times; and more value through lower costs or higher quality components. Implementing complete supply chain solutions across multiple geographies is a prerequisite for succeeding in today’s marketplace. Jabil provides customers synchronous solutions everyday, around the clock and around the globe. Sector-specific solutions allow Jabil to rapidly meet the only constant in the world of electronics manufacturing: change.
  10. 10. DEAR EmpLOyEES, SHAREHOLDERS AnD pARtnERS, The past eighteen months have been an extraordinary period of change for Jabil. We have experienced adversity but we have also taken meaningful steps to continue building a prosperous company in a growing industry. In fiscal 2006 Jabil continued to show very strong revenue growth as revenues topped $10.3 billion, 36 percent higher than in fiscal 2005. Growth occurred in all segments but was particularly strong in our consumer and instrumentation and medical sectors. This growth continued in the first half of fiscal 2007, as revenues climbed to $6.2 billion, 31 percent higher than in the first half of fiscal 2006. However, profitability did not follow this growth trend and we have not been satisfied with recent financial performance. During the second half of fiscal 2006 we experienced unanticipated expenses in new and existing operations and underperforming business plans. In addition, since mid 2006 end-markets have weakened and excess capacity in our industry has led to a more severe pricing environment, particularly in the consumer electronics sector. This change in the macro-economic environment, along with a negative industry sector environment, hurt profitability and prompted a number of corrective actions. Globally, we are rationalizing our manufacturing capacity and reducing the cost of our infrastructure. These changes, while painful for our people in the short-term, are necessary to ensure the future Timothy L. Main viability of our company and the competitiveness of our value proposition. We have eliminated certain consumer electronics products of our own design from our forward-looking business plan as market dynamics for those products are no longer attractive. We have also reduced our participation in some hyper-competitive areas of the consumer sector to focus on higher value-add and higher return products and services. We expect to begin seeing the benefits of these various corrective actions over the second half of fiscal 2007 and into fiscal 2008. During the past year we made a number of key moves designed to enhance our value proposition. The most significant of these was the acquisition of Taiwan Green Point, announced in November of 2006 and finalized in April of 2007. This acquisition brings us significant technology and know-how in mobile product casings, decorative finishes and plastics. The vertical integration of this capability with our consumer sector and mobile products customers should result in a superior end-to-end William D. Morean solution for customers. Mobile product customers want to outsource to select partners that can provide technology and product velocity at low cost. Jabil is now one of the very few companies that can provide this combination. We expect to enjoy healthy long-term growth in mobile products as the market expands and as customers continue to outsource their development and manufacturing requirements. We expanded significantly into India, a rapidly growing economy with a burgeoning appetite for electronics as incomes rise and both business and consumer demand expands. We acquired Celetronix in March of 2006 and recently opened a new site in the emerging electronics hub of Chennai. We expect our revenue and profitability in India to show meaningful growth in fiscal 2008. We were awarded Mexico’s “National Quality Award” in April of 2007. This prestigious award, personally presented by Mexico’s President Felipe Calderón to our Guadalajara team, acknowledged Jabil’s “best total 8
  11. 11. quality management practices” in Mexico. We also opened a new factory in the Ukraine, significantly expanded our site in Poland and experienced robust growth in our China and Malaysia operations. Our sites in the USA have stabilized and some are experiencing expansion. Notably, our fulfillment operation in Memphis expanded significantly and achieved very strong operational performance during the year. New customer additions and the development of new and emerging sectors have been vigorous throughout the year. In fiscal 2006 and through the first half of fiscal 2007, we continued to post double digit year-over- year revenue growth in the computing and storage, instrumentation and medical, networking, peripherals and after-market services sectors. New customer additions have been at a brisk pace and market share has improved against most of our competitors. Jabil is now the third largest EMS provider in the world today, up from number six just two years ago. Our new customer wins and market share expansion should support enhanced profitability and invested capital returns in the future. Our services have expanded and increased in sophistication. Our product development capabilities resulted in profitable expansion of our business in the computing and storage and consumer electronics sectors. Order fulfillment services increased dramatically in the networking and in the instrumentation and medical sectors. Jabil is a recognized leader in providing a comprehensive set of integrated services and we will continue to invest in these areas in the years to come. Approximately one year ago, we were wrongfully identified as one of several companies who might have backdated stock options. As a result, our options practices came under intense scrutiny by a variety of sources and we began a review of our stock option practices. As we have previously reported, the Special Committee of the Board of Directors concluded that there was no merit to the allegations. The Special Committee’s review, and our own internal review, did identify errors in the ways in which we accounted for certain option grants. We have restated our financial statements for the impacted time periods and all of this information is detailed in the Form – 10K. We are working hard to bring closure to these matters so that we can return our entire focus to growing the business and improving shareholder value. We believe we are making the necessary course corrections and taking proactive steps to adapt to changing conditions and to fully exploit market opportunities. Throughout this difficult period, our people have remained steadfast in their resolve and commitment to Jabil. This has been inspiring and it challenges our leadership to provide the stewardship and direction their commitment deserves. We are not where we intended to be a year ago. However, we are winning with customers and our operational execution is in fundamentally sound condition. We are well diversified and now enjoy broad exposure to the virtualization of the global electronics supply chain. We have added key vertical capabilities in targeted sectors and we are enjoying new business wins with this vertically integrated value proposition. We have the best people in the business. In the future, we expect our industry to grow and to consolidate around a smaller number of global players. We look forward to our future with great optimism. timothy l. main William D. morean president and Chairman Chief Executive Officer
  12. 12. FInAnCIAL HIGHLIGHtS summary statement of Income for the Year ended august 31, (in thousands, except per share data) 1996 1997 1998 Net Revenue $1,050,624 $1,178,644 $1,484,245 Operating Income (GAAP) $ 52,457 $ 88,628 $ 86,434 Amortization of intangibles — — — Acquisition-related charges — — 20,825 Restructuring and impairment charges — — — Goodwill write-off — — 3,578 Stock-based compensation 63 123 245 Core Operating Income (Non-GAAP) $ 52,520 $ 88,751 $ 111,082 Operating Income (GAAP) year over year % change 114.6% 69.0% -2.5% Core operating income (Non-GAAP) year over year % change 114.9% 69.0% 25.2% Net Income (GAAP) $ 30,340 $ 59,229 $ 57,310 Amortization of intangibles, net of tax — — — Acquisition-related charges, net of tax — — 12,902 Write-off of deferred tax assets, net of tax — — — Restructuring and impairment charges, net of tax — — — Goodwill write-off, net of tax — — 3,301 Stock-based compensation, net of tax 44 84 159 Other (income)/loss, net of tax — — — Core Earnings (Non-GAAP) $ 30,384 $ 59,313 $ 73,672 Earnings Per Share: (GAAP)*** Basic $ 0.21 $ 0.38 $ 0.36 Basic earnings per share year over year % change 103.1% 86.0% -5.3% Diluted $ 0.20 $ 0.36 $ 0.35 Diluted earnings per share year over year % change 104.7% 85.3% -3.9% Core Earnings Per Share: (Non-GAAP)*** Basic $ 0.21 $ 0.38 $ 0.46 Basic earnings per share year over year % change 103.4% 85.9% 21.5% Diluted $ 0.20 $ 0.36 $ 0.45 Diluted earnings per share year over year % change 105% 85.3% 23.4% Common Shares Used in the Calculation of Earnings Per Share:*** Basic 147,815 155,181 158,589 Diluted 155,558 163,890 164,934 summary balance sheet Data (in thousands) Total Assets $ 370,025 $ 484,133 $ 625,173 Capitalization* $ 225,725 $ 279,643 $ 397,078 Stockholders’ Equity $ 152,884 $ 216,930 $ 285,194 Key ratios GAAP Return on Invested Capital 22.2% 33.0% 20.7% Core Return on Invested Capital **** 22.2% 33.1% 26.2% GAAP Return on Equity 25.8% 32.0% 22.8% Core Return on Equity** 25.8% 32.1% 29.3% Inventory Turns 9.7 10.9 10.3 Sales Cycle 39.7 29.5 30.0 *Capitalization is calculated as stockholders’ equity plus total debt. **The calculation of core return on equity is based on core earnings as reconciled above. ***Reflects 2-for-1 stock splits in 7/97, 2/99 and 3/00. ****The calculation of core return on invested capital is based on core earnings as reconciled above. 10
  13. 13. 1999 2000 2001 2002 2003 2004 2005 2006 $2,238,391 $3,558,321 $4,324,655 $3,545,466 $4,729,482 $6,252,897 $7,524,386 $10,265,447 $ 134,690 $ 209,163 $ 155,308 $ 53,407 $ 28,303 $ 221,771 $ 251,967 241,807 1,225 2,724 5,820 15,113 36,870 43,709 39,762 24,323 7,030 5,153 6,558 7,576 15,266 1,339 — — — — 27,366 52,143 85,308 — — 81,585 3,578 — — — — — — — 1,187 3,753 2,454 643 16,150 (5,756) 35,403 43,848 $ 147,710 $ 220,793 $ 197,506 $ 128,882 $ 181,897 $ 261,063 $ 327,132 $ 391,563 55.8% 55.3% -25.7% -65.6% -47.0% 683.6% 13.6% -4.0% 33.0% 49.5% -10.5% -34.7% 41.1% 43.5% 25.3% 19.7% $ 84,072 $ 143,297 $ 112,332 $ 38,731 $ 28,570 $ 173,730 $ 203,875 $ 164,518 809 1,866 4,284 12,593 30,848 37,239 33,698 20,281 6,519 4,653 4,163 4,748 9,827 987 — — — — — — — — — 37,103 — — 21,588 40,167 60,688 — — 70,062 3,305 — — — — — — — 747 2,351 2,195 (26) 14,437 (6,830) 27,973 32,390 — — — — (1,622) 3,975 — — $ 95,452 $ 152,167 $ 144,562 $ 96,213 $ 142,748 $ 209,101 $ 265,546 $ 324,354 $ 0.50 $ 0.80 $ 0.59 $ 0.20 $ 0.14 $ 0.87 $ 1.01 $ 0.79 39.5% 58.8% -26.9% -66.5% -26.6% 502.2% 16.2% -21.2% $ 0.48 $ 0.76 $ 0.56 $ 0.19 $ 0.14 $ 0.85 $ 0.98 $ 0.77 38.8% 58.5% -27.3% -65.2% -26.7% 496.6% 16.1% -21.1% $ 0.57 $ 0.85 $ 0.75 $ 0.49 $ 0.72 $ 1.04 $ 1.31 $ 1.56 23.2% 48.5% -11.4% -35.3% 47.5% 45.1% 25.7% 19.3% $ 0.55 $ 0.81 $ 0.71 $ 0.48 $ 0.71 $ 1.02 $ 1.28 $ 1.53 22.6% 48.3% -11.9% -32.9% 47.5% 43.7% 25.7% 19.4% 166,754 179,032 191,862 197,396 198,495 200,430 202,501 207,413 174,334 187,448 202,223 200,535 201,671 205,559 207,706 212,540 $1,035,421 $2,015,915 $2,357,578 $2,547,906 $3,244,745 $3,334,039 $4,087,986 $ 5,411,730 $ 644,124 $1,305,353 $1,782,132 $1,873,010 $2,236,924 $2,133,629 $2,473,195 $ 2,687,814 $ 578,301 $1,272,020 $1,412,132 $1,509,650 $1,592,669 $1,824,023 $2,145,941 $ 2,294,481 20.0% 19.6% 9.7% 3.4% 2.3% 12.6% 13.6% 10.2% 22.6% 20.8% 12.5% 7.9% 11.1% 14.5% 17.2% 18.5% 19.5% 15.5% 8.4% 2.7% 1.8% 10.2% 10.3% 7.4% 22.1% 16.4% 10.8% 6.6% 9.2% 12.2% 13.4% 14.6% 11.1 9.2 8.7 7.7 9.5 9.8 9.3 8.4 25.3 28.9 40.8 50.4 36.4 29.4 20.8 14.9 Financial results for Fiscal Years 2002 through 2005 were restated in the company’s recent Annual Report on Form 10-K for the fiscal year ended August 31, 2006 that was filed with the Securities and Exchange Commission on May 15, 2007. Such restatements arose out of the Company’s review of certain of its his- torical stock option grant and revenue recognition practices. Such restated financial results are reflected in the above table. In addition, the financial results for Fiscal Years 1996 through 2001 in this table have also been restated to reflect the results of such reviews. 11
  14. 14. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 2006 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-14063 JABIL CIRCUIT, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 38-1886260 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10560 Dr. Martin Luther King, Jr. Street North, St. Petersburg, Florida 33716 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (727) 577-9749 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $0.001 par value per share New York Stock Exchange Series A Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ‘ No È Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È The aggregate market value of the voting common stock held by non-affiliates of the Registrant based on the closing sale price of the Common Stock as reported on the New York Stock Exchange on February 28, 2007 was approximately $4.9 billion. For purposes of this determination, shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s Common Stock as of the close of business on April 20, 2007, was 205,981,056. The Registrant does not have any non-voting stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None.
  15. 15. JABIL CIRCUIT, INC. 2006 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Part I. Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . 82 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Part III. Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Part IV. Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
  16. 16. Explanatory Note This Annual Report on Form 10-K contains the restatement of our Consolidated Balance Sheet as of August 31, 2005 and our Consolidated Statements of Earnings, Comprehensive Income, Stockholders’ Equity and Cash Flows for the years ended August 31, 2005 and 2004, and Selected Consolidated Financial Data as of and for the years ended August 31, 2005, 2004, 2003 and 2002, and for each of the four quarters in the period ended August 31, 2005. As previously disclosed, we are involved in shareholder derivative and purported securities class action lawsuits and have received inquiries from the government regarding certain of our historical stock option grants. In light of these developments, through our legal counsel assisted by accounting advisors, we undertook a review of certain of our historical stock option grant practices. Separately, a Special Committee of our Board of Directors was also appointed to review the allegations in the derivative actions. The Special Committee concluded, as previously announced, that there was no merit to allegations that our officers issued themselves backdated stock options or attempted to cause others to issue them. In addition, the Special Committee concluded that it is not in our best interests to pursue the derivative actions and will assert that position on the Company’s behalf in each of the pending derivative lawsuits. The Special Committee’s review, and our internal review, identified certain errors in the ways in which we accounted for certain option grants. These errors, which are described more fully below, generally fall into one of three categories. First, there were situations in which we incorrectly identified the “measurement date” used to establish the exercise price for option grants. These situations, for the most part, occurred because we believed that a grant was “final” when, in fact, the identities of grant recipients or the number of options they were to receive had not yet been established with certainty. Under the applicable accounting literature, we should not have identified a measurement date until the grant was final. Second, there was one situation in which a grant to a large number of non-executive employees was finalized but, before the options could be distributed, the price of the underlying stock fell significantly. Because we did not wish to issue these employees “underwater” options, we cancelled those options and issued new ones. Under the applicable accounting literature, we should have treated the subsequent grant as a repricing of the first grant, and applied variable accounting for the life of these grants. Third, we retained as a consultant an individual who served on the Board of Directors, and awarded him options as compensation for his performance for those consulting services. The applicable accounting literature required that we account for options granted to a consultant differently from the way that we account for options granted to an employee, which we failed to do. Our consolidated retained earnings as of August 31, 2005 incorporates an aggregate of approximately $41.1 million in incremental stock-based compensation charges relating to fiscal years 1996 through 2005. This charge is net of a $13.2 million tax benefit related to the restatement adjustments. Of the gross $54.3 million of incremental compensation charges for fiscal years 1996 through 2005, approximately $48.9 million was related to options granted to employees who were neither our executive officers nor our directors at the time the grants were made and approximately $1.7 million related to various options granted to individuals who were our executive officers or directors at the time the grants were made. The remaining $3.7 million related to options granted to a director over a period of five years for his providing consulting services to us related to our merger and acquisition activities. In that instance, we failed to recognize that the applicable accounting guidance requires different treatment of grants issued to individuals acting as consultants and recorded part, but not all, of the expense associated with those grants. In those cases in which we previously used a measurement date that we now have determined should not have been used, we have developed and applied a methodology to remeasure those stock option grants and record the relevant charges. For more information on our restatement, see Item 7, “Management’s Discussion of 2
  17. 17. Financial Condition and Results of Operations – Stock Option Litigation and Restatement of Consolidated Financial Statements” and Note 2 – “Stock Option Litigation and Restatements” to our Consolidated Financial Statements appearing in Item 8 of this Annual Report on Form 10-K. All financial information contained in this Annual Report on Form 10-K gives effect to the restatements of our Consolidated Financial Statements as described above. We have not amended, and we do not intend to amend, our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for each of the fiscal years and fiscal quarters of 1996 through 2005. Financial information included in reports that we previously filed or furnished for the periods from September 1, 1995 through August 31, 2005 should not be relied upon and are superseded by the information in this Annual Report on Form 10-K. As we have previously disclosed, our review of our historical stock option practices led us to review certain transactions proposed or effected between fiscal years 1999 and 2002 to determine if we properly recognized revenue associated with those transactions. The Audit Committee of our Board of Directors engaged independent legal counsel to assist it in reviewing certain proposed or effected transactions with two customers that occurred during this period. In the course of the review, an additional transaction was identified and the Audit Committee included it in the scope of its review. The review concluded that in one of the three transactions there was inadequate documentation to support our recognition in the third quarter of fiscal year 2001 of $6.0 million ($4.0 million after-tax) of revenues we received from a particular customer in fiscal year 2001. Although we had a contractual basis to receive the revenues that were paid to us in fiscal year 2001, we subsequently acquiesced in the second quarter of fiscal year 2002 to the customer’s request to refund the money. The Audit Committee’s review determined that there was no direct evidence that anyone at the Company intentionally made or caused false accounting entries to be made in connection with either the receipt of or repayment of these funds. We have evaluated the overstatement of net income by approximately $4.0 million in fiscal year 2001 and understatement of net income in fiscal year 2002 by the same amount and concluded, considering both qualitative and quantitative factors, that the impact on those years was immaterial. However, because we have also reflected immaterial amounts of additional stock option related expense for 2002 (and other years) in the Selected Financial Data in Item 6 of this Form 10-K, we are also reducing our expense for fiscal year 2002 in the Selected Financial Data in Item 6 of this Form 10-K to reflect the immaterial accounting error associated with these events. Since the time of the events at issue, we have substantially improved our internal audit and financial reporting functions and have increased the number and the level of expertise of personnel dedicated to such functions. The Company’s Board of Directors is evaluating whether additional changes should be made in light of the findings of the reviews of historical revenue recognition and stock option practices. 3
  18. 18. PART I Item 1. Business References in this report to “the Company”, “Jabil”, “we”, “our”, or “us” mean Jabil Circuit, Inc. together with its subsidiaries, except where the context otherwise requires. This Annual Report on Form 10-K contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are made in reliance upon the protections provided by such acts for forward-looking statements. These forward-looking statements (such as when we describe what “will”, “may” or “should” occur, what we “plan”, “intend”, “estimate”, “believe”, “expect” or “anticipate” will occur, and other similar statements) include, but are not limited to, statements regarding future sales and operating results, future prospects, anticipated benefits of proposed (or future) acquisitions and new facilities, growth, the capabilities and capacities of business operations, any financial or other guidance and all statements that are not based on historical fact, but rather reflect our current expectations concerning future results and events. We make certain assumptions when making forward-looking statements, any of which could prove inaccurate, including, but not limited to, statements about our future operating results and business plans. Therefore, we can give no assurance that the results implied by these forward-looking statements will be realized. Furthermore, the inclusion of forward-looking information should not be regarded as a representation by the Company or any other person that future events, plans or expectations contemplated by the Company will be achieved. The ultimate correctness of these forward-looking statements is dependent upon a number of known and unknown risks and events, and is subject to various uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance or achievements expressed or implied by these statements. The following important factors, among others, could affect future results and events, causing those results and events to differ materially from those expressed or implied in our forward-looking statements: • business conditions and growth in our customers’ industries, the electronic manufacturing services industry and the general economy; • the results of the review of our past stock option grants being conducted by governmental authorities and related litigation and any ramifications thereof; • variability of operating results; • our ability to effectively address certain operational issues that have adversely affected certain of our US operations; • our dependence on a limited number of major customers; • the potential consolidation of our customer base; • availability of components; • our dependence on certain industries; • seasonality; • the variability of customer requirements; • our ability to successfully negotiate definitive agreements and consummate acquisitions, and to integrate operations following consummation of acquisitions; • our ability to take advantage of our past and current restructuring efforts to improve utilization and realize savings and whether any such activity will adversely affect our cost structure, ability to service customers and labor relations; • other economic, business and competitive factors affecting our customers, our industry and our business generally; and 4
  19. 19. • other factors that we may not have currently identified or quantified. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this document. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements. All forward-looking statements included in this Annual Report on Form 10-K are made only as of the date of this Annual Report on Form 10-K, and we do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. You should read this document and the documents that we incorporate by reference into this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. The Company We are one of the leading providers of worldwide electronic manufacturing services and solutions. We provide comprehensive electronics and mechanical design, production, product management and after-market services to companies in the aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, storage, and telecommunications industries. We serve our customers primarily with dedicated business units that combine highly automated, continuous flow manufacturing with advanced electronic design and design for manufacturability technologies. Based on net revenue for the fiscal year ended August 31, 2006, our largest customers currently include Agilent Technologies, Cisco Systems, Inc., Hewlett- Packard Company, International Business Machines Corporation, Network Appliance, NEC Corporation (“NEC”), Nokia Corporation, Royal Philips Electronics (“Philips”), Tellabs, Inc., and Valeo S.A. (“Valeo”). For the fiscal year ended August 31, 2006, we had net revenues of approximately $10.3 billion and net income of approximately $164.5 million. We offer our customers electronics and mechanical design, production, product management and after- market solutions that are responsive to their manufacturing needs. Our business units are capable of providing our customers with varying combinations of the following services: • integrated design and engineering; • component selection, sourcing and procurement; • automated assembly; • design and implementation of product testing; • parallel global production; • enclosure services; • systems assembly, direct-order fulfillment and configure-to-order; and • after-market services. We currently conduct our operations in facilities that are located in Austria, Belgium, Brazil, China, England, France, Germany, Hungary, India, Italy, Japan, Malaysia, Mexico, the Netherlands, Poland, Scotland, Singapore, Taiwan, Ukraine and the United States. Our global manufacturing production sites allow our customers to manufacture products in parallel in what we believe are the most efficient marketplaces for their products. Our services allow customers to improve supply-chain management, reduce inventory obsolescence, lower transportation costs and reduce product fulfillment time. 5
  20. 20. We entered into a merger agreement on November 22, 2006 with Taiwan Green Point Enterprises Co., Ltd. (“Green Point”), pursuant to which Green Point agreed to merge with and into an existing Jabil entity in Taiwan. The legal merger was effective on April 24, 2007. The legal merger was primarily achieved through a tender offer that we made to acquire 100% of the outstanding shares of Green Point for 109.0 New Taiwan dollars per share. The tender offer was launched on November 23, 2006 and remained open for a period of 50 days. During the tender offer period, we acquired approximately 260.9 million shares, representing 97.6% of the outstanding shares of Green Point. On January 16, 2007, we paid cash of approximately $870.7 million (in U.S. dollars) to acquire the tendered shares. Subsequent to the completion of the tender offer and prior to the completion of the acquisition, we acquired approximately 2.1 million Green Point shares in block trades for a price of 109.0 New Taiwan dollars per share (or approximately $7.0 million in U.S. dollars). On April 24, 2007, pursuant to the November 22, 2006 merger agreement, we acquired the approximately 4.1 million remaining outstanding Green Point shares that were not tendered during the tender offer period, for 109.0 New Taiwan dollars per share (or approximately $13.3 million in U.S. dollars). In total, we paid a total cash amount of approximately $891.0 million in U.S. dollars to complete the merger with Green Point. To fund the acquisition, we entered into a $1.0 billion, 364-day senior unsecured bridge loan facility with a global financial institution on December 21, 2006. See Note 17 – “Subsequent Events” to the Consolidated Financial Statements for further discussion. Green Point specializes in the design and production of advanced plastics and metals for the mobile products market. We acquired these operations to enhance our position in the mobile products market and to offer end-to-end capability with long-term growth prospects. Our principal executive offices are located at 10560 Dr. Martin Luther King, Jr. Street North, St. Petersburg, Florida 33716, and our telephone number is (727) 577-9749. We were incorporated in Delaware in 1992. Our website is located at Through a link on the “Investors” section of our website, we make available the following financial filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”): our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings are available free of charge. Information contained in our website, whether currently posted or posted in the future, is not a part of this document or the documents incorporated by reference in this document. Industry Background The industry in which we operate is composed of companies that provide a range of manufacturing services to companies that utilize electronics components. The industry experienced rapid change and growth through the 1990’s as an increasing number of companies chose to outsource an increasing portion, and, in some cases, all of their manufacturing requirements. In mid-2001, the industry’s revenue declined as a result of significant cut-backs in customer production requirements, which was consistent with the overall global economic downturn at that time. Industry revenues generally began to stabilize in 2003 and companies continue to turn to outsourcing versus internal manufacturing. We believe further growth opportunities exist for the industry to penetrate the worldwide electronics markets. Factors driving companies to favor outsourcing include: • Reduced Product Cost. Industry providers are able to manufacture products at a reduced total cost to companies. These cost advantages result from higher utilization of capacity because of diversified product demand and, typically, a higher sensitivity to elements of cost. • Accelerated Product Time-to-Market and Time-to-Volume. Industry providers are often able to deliver accelerated production start-ups and achieve high efficiencies in transferring new products into production. Providers are also able to more rapidly scale production for changing markets and to position themselves in global locations that serve the leading world markets. With increasingly shorter product life cycles, these key services allow new products to be sold in the marketplace in an accelerated time frame. 6
  21. 21. • Access to Advanced Design and Manufacturing Technologies. Customers may gain access to additional advanced technologies in manufacturing processes, as well as product and production design. Product and production design services may offer customers significant improvements in the performance, cost, time-to-market and manufacturability of their products. • Improved Inventory Management and Purchasing Power. Industry providers are able to manage both procurement and inventory, and have demonstrated proficiency in purchasing components at improved pricing due to the scale of their operations and continuous interaction with the materials marketplace. • Reduced Capital Investment in Manufacturing. Companies are increasingly seeking to lower their investment in inventory, facilities and equipment used in manufacturing in order to allocate capital to other activities such as sales and marketing, and research and development (“RD”). This shift in capital deployment has placed a greater emphasis on outsourcing to external manufacturing specialists. Our Strategy We are focused on expanding our position as one of the leading providers of worldwide electronics and mechanical design, production, product management and after-market services. To achieve this objective, we continue to pursue the following strategies: • Establish and Maintain Long-Term Customer Relationships. Our core strategy is to establish and maintain long-term relationships with leading companies in expanding industries with the size and growth characteristics that can benefit from highly automated, continuous flow manufacturing on a global scale. Over the last three years, we have made concentrated efforts to diversify our industry sectors and customer base. As a result of these efforts, we have experienced business growth from existing customers and from new customers as a result of organic business wins. Additionally, our acquisitions have meaningfully contributed to our business growth. We focus on maintaining long-term relationships with our customers and seek to expand these relationships to include additional product lines and services. In addition, we have a focused effort to identify and develop relationships with new customers who meet our profile. • Utilize Business Units. Our business units are dedicated to one customer and operate with a high level of autonomy, utilizing dedicated production equipment, production workers, supervisors, buyers, planners, and engineers. We believe our customer centric business units promote increased responsiveness to our customers’ needs, particularly as a customer relationship grows to multiple production locations. • Expand Parallel Global Production. Our ability to produce the same product on a global scale is a significant requirement of our customers. We believe that parallel global production is a key strategy to reduce obsolescence risk and secure the lowest landed costs while simultaneously supplying products of equivalent or comparable quality throughout the world. Consistent with this strategy, we have established or acquired operations in Austria, Belgium, Brazil, China, England, France, Hungary, India, Italy, Japan, Malaysia, Mexico, the Netherlands, Poland, Scotland, Singapore, Taiwan, and Ukraine to increase our European, Asian and Latin American presence. • Offer Systems Assembly, Direct-Order Fulfillment and Configure-to-Order Services. Our systems assembly, direct-order fulfillment and configure-to-order services allow our customers to reduce product cost and risk of product obsolescence by reducing total work-in-process and finished goods inventory. These services are available at all of our manufacturing locations. • Pursue Selective Acquisition Opportunities. Companies have continued to divest internal manufacturing operations to manufacturing providers such as Jabil. In many of these situations, companies enter into a customer relationship with the manufacturing provider that acquires the operations. More recently, our acquisition strategy has expanded beyond focusing on acquisition opportunities presented by companies divesting internal manufacturing operations, but also pursuing 7
  22. 22. manufacturing, after-market services and/or design operations and other acquisition opportunities complementary to our services offerings. The primary goal of our acquisition strategy is to complement our geographic footprint and diversify our business into new industry sectors and with new customers, and to expand the scope of the services we can offer to our customers. As the scope of our acquisition opportunities expands, the risks associated with our acquisitions expand as well, both in terms of the amount of risk we face and the scope of such risks. See “Risk Factors – We may not achieve expected profitability from our acquisitions.” Our Approach to Manufacturing In order to achieve high levels of manufacturing performance, we have adopted the following approaches: • Business Units. Our business units are dedicated to one customer and are empowered to formulate strategies tailored to individual customer needs. Each business unit has dedicated production lines consisting of equipment, production workers, supervisors, buyers, planners and engineers. Under certain circumstances, a production line may include more than one business unit in order to maximize resource utilization. Business units have direct responsibility for manufacturing results and time-to-volume production, promoting a sense of individual commitment and ownership. The business unit approach is modular and enables us to grow incrementally without disrupting the operations of other business units. • Business Unit Management. Our Business Unit Managers coordinate all financial, manufacturing and engineering commitments for each of our customers at a particular manufacturing facility. Our Business Unit Directors oversee local Business Unit Managers and coordinate worldwide financial, manufacturing and engineering commitments for each of our customers that have global production requirements. Jabil’s Business Unit Management has the authority (within high-level parameters set by executive management) to develop customer relationships, make design strategy decisions and production commitments, establish pricing, and implement production and electronic design changes. Business Unit Managers and Directors are also responsible for assisting customers with strategic planning for future products, including developing cost and technology goals. These Managers and Directors operate autonomously with responsibility for the development of customer relationships and direct profit and loss accountability for business unit performance. • Automated Continuous Flow. We use a highly automated, continuous flow approach where different pieces of equipment are joined directly or by conveyor to create an in-line assembly process. This process is in contrast to a batch approach, where individual pieces of assembly equipment are operated as freestanding work-centers. The elimination of waiting time prior to sequential operations results in faster manufacturing, which improves production efficiencies and quality control, and reduces inventory work-in-process. Continuous flow manufacturing provides cost reductions and quality improvement when applied to volume manufacturing. • Computer Integration. We support all aspects of our manufacturing activities with advanced computerized control and monitoring systems. Component inspection and vendor quality are monitored electronically in real-time. Materials planning, purchasing, stockroom and shop floor control systems are supported through a computerized Manufacturing Resource Planning system, providing customers with a continuous ability to monitor material availability and track work-in-process on a real-time basis. Manufacturing processes are supported by a real-time, computerized statistical process control system, whereby customers can remotely access our computer systems to monitor real-time yields, inventory positions, work-in-process status and vendor quality data. See “Technology” and “Risk Factors – Any delay in the implementation of our information systems could disrupt our operations and cause unanticipated increases in our costs.” • Supply Chain Management. We make available an electronic commerce system/electronic data interchange and web-based tools for our customers and suppliers to implement a variety of supply 8
  23. 23. chain management programs. Most of our customers utilize these tools to share demand and product forecasts and deliver purchase orders. We use these tools with most of our suppliers for just-in-time delivery, supplier-managed inventory and consigned supplier-managed inventory. Our Design Services We offer a wide spectrum of value-add design services for products that we manufacture for our customers. We provide these services to enhance our relationships with current customers and to help develop relationships with new customers. We offer the following design services: • Electronic Design. Our electronic design team provides electronic circuit design services, including application-specific integrated circuit design and firmware development. These services have been used to develop a variety of circuit designs for cellular telephone accessories, notebook and personal computers, servers, radio frequency products, video set-top boxes, optical communications products, personal digital assistants, communication broadband products, and automotive and consumer appliance controls. • Industrial Design Services. Our industrial design team assists in designing the “look and feel” of the plastic and metal enclosures that house printed circuit board assemblies (“PCBA”) and systems. • Mechanical Design. Our mechanical engineering design team specializes in three-dimensional design and analysis of electronic and optical assemblies using state of the art modeling and analytical tools. The mechanical team has extended Jabil’s product offering capabilities to include all aspects of industrial design, advance mechanism development and tooling management. • Computer-Assisted Design. Our computer-assisted design (“CAD”) team provides PCBA design services using advanced CAD/computer-assisted engineering tools, PCBA design testing and verification services, and other consulting services, which include the generation of a bill of materials, approved vendor list and assembly equipment configuration for a particular PCBA design. We believe that our CAD services result in PCBA designs that are optimized for manufacturability and cost, and accelerate the time-to-market and time-to-volume production. • Product Validation. Our product validation team provides complete product and process validation. This includes system test, product safety, regulatory compliance and reliability. • Product Solutions. Our product solutions efforts are focused on providing system-based solutions to engineering problems and challenges on the design of new technologies and concepts in specific growth areas as a means of expanding our customer relationships. Our design centers are located in: Vienna, Austria; Hasselt, Belgium; Shanghai and Huangpu, China; St. Petersburg, Florida; Jena, Germany; Mumbai, India; Tokyo, Japan; Penang, Malaysia; Auburn Hills, Michigan; and Hsinchu, Taiwan. Our teams are strategically staffed to support Jabil customers for all development projects, including turnkey system design and design for manufacturing activities. See “Risk Factors – We may not be able to maintain our engineering, technological and manufacturing process expertise.” As we increase our efforts to offer design services, we are exposed to different or greater potential liabilities than those we face from our regular manufacturing services. See “Risk Factors – Our increasing design services offerings may result in additional exposure to product liability, intellectual property infringement and other claims, in addition to the business risk of being unable to produce the revenue necessary to profit from these services.” Our Systems Assembly, Test, Direct-Order Fulfillment and Configure-to-Order Services We offer systems assembly, test, direct-order fulfillment and configure-to-order services to our customers. Our systems assembly services extend our range of assembly activities to include assembly of higher-level 9
  24. 24. sub-systems and systems incorporating multiple PCBAs. We maintain systems assembly capacity to meet the increasing demands of our customers. In addition, we provide testing services, based on quality assurance programs developed with our customers, of the PCBAs, sub-systems and systems products that we manufacture. Our quality assurance programs include circuit testing under various environmental conditions to try to ensure that our products meet or exceed required customer specifications. We also offer direct-order fulfillment and configure-to-order services for delivery of final products we assemble for our customers. Our After-Market Services As an extension of our manufacturing model and an enhancement to our total global solution, we offer after- market services from strategic hub locations. Jabil after-market service centers provide warranty and repair services to certain of our manufacturing customers. We have the ability to service our customers’ products following completion of the traditional manufacturing and fulfillment process. Our after-market service centers are located in: Sao Paulo, Brazil; Shanghai, China; Coventry, England; St. Petersburg, Florida; Szombathely, Hungary; Louisville, Kentucky; Penang, Malaysia; Reynosa, Mexico; Amsterdam, the Netherlands; Bydgozcz, Poland; Memphis, Tennessee; and Round Rock and McAllen, Texas. Technology We believe that our manufacturing and testing technologies are among the most advanced in the industry. Through our research and development (“RD”) efforts, we intend to continue to offer our customers among the most advanced highly automated, continuous flow manufacturing process technologies. These technologies include surface mount technology, high-density ball grid array, chip scale packages, flip chip/direct chip attach, advanced chip-on-board, thin substrate processes, reflow solder of mixed technology circuit boards, lead-free processing, densification, radio frequency process optimization, and other testing and emerging interconnect technologies. In addition to our RD activities, we are continuously making refinements to our existing manufacturing processes in connection with providing manufacturing services to our customers. See “Risk Factors – We may not be able to maintain our engineering, technological and manufacturing process expertise.” Research and Development To meet our customers’ increasingly sophisticated needs, we continually engage in RD activities. These activities include design of the PCBA, mechanical design and the related production design necessary to manufacture the PCBA in the most cost-effective and reliable manner. We are engaged in the RD of new reference and product designs including networking and server products, cell phone products, wireless and broadband access products, consumer products and storage products. We are also engaged in internal RD efforts, which focus on new optical, test engineering, radio frequency and wireless failure analysis technologies. For fiscal years 2006, 2005 and 2004, we expended $35.0 million, $22.5 million and $13.8 million, respectively, on RD activities. 10
  25. 25. Customers and Marketing Our core strategy is to establish and maintain long-term relationships with leading companies in expanding industries with the size and growth characteristics that can benefit from highly automated, continuous flow manufacturing on a global scale. A small number of customers and significant industry sectors have historically comprised a major portion of our revenue, net of estimated product return costs (“net revenue”). The table below sets forth the respective portion of net revenue for the applicable period attributable to our customers who individually accounted for approximately 10% or more of our net revenue in any respective period: Fiscal Year Ended August 31, 2006 2005 2004 Nokia Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21% 13% * Royal Philips Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12% 14% 18% Hewlett-Packard Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * 10% * Cisco Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 12% * less than 10% of net revenue Our net revenue was distributed over the following significant industry sectors for the periods indicated: Fiscal Year Ended August 31, 2006 2005 2004 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36% 29% 25% Instrumentation and medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17% 16% 12% Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13% 15% 20% Computing and storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12% 12% 13% Peripherals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7% 8% 6% Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6% 9% 11% Automotive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5% 7% 8% Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4% 4% 5% 100% 100% 100% In fiscal year 2006, 50 customers accounted for approximately 90% of our net revenue. We currently depend, and expect to continue to depend upon a relatively small number of customers for a significant percentage of our net revenue. As illustrated in the two tables above, the historic percentages of net revenue we have received from specific customers or significant industry sectors have varied substantially from year to year. Accordingly, these historic percentages are not necessarily indicative of the percentage of net revenue that we may receive from any customer or industry sector in the future. In the past, some of our customers have terminated their manufacturing arrangements with us or have significantly reduced or delayed the volume of design, production, product management and after-market services ordered from us. We cannot provide assurance that present or future customers will not terminate their manufacturing arrangements with us or significantly change, reduce or delay the amount of design, production, product management and after-market services ordered from us. If they do, it could have a material adverse effect on our results of operations. See “Risk Factors – Because we depend on a limited number of customers, a reduction in sales to any one of our customers could cause a significant decline in our revenue” and Note 14 – “Concentration of Risk and Segment Data” to the Consolidated Financial Statements. We have made concentrated efforts to diversify our industry sectors and customer base through acquisitions and organic growth. Our Business Unit Managers and Directors, supported by executive management, work to expand existing customer relationships through the addition of product lines and services. These individuals also identify and attempt to develop relationships with new customers who meet our profile. This profile includes financial stability, need for technology-driven turnkey manufacturing, anticipated unit volume and long-term 11
  26. 26. relationship stability. Unlike traditional sales managers, our Business Unit Managers and Directors are responsible for ongoing management of production for their customers. International Operations A key element of our strategy is to provide localized production of global products for leading companies in the major consuming regions of the Americas, Europe and Asia. Consistent with this strategy, we have established or acquired manufacturing, design and/or after-market service facilities in Austria, Belgium, Brazil, China, England, France, Germany, Hungary, India, Italy, Japan, Malaysia, Mexico, the Netherlands, Poland, Scotland, Singapore, Taiwan, and Ukraine. Our European facilities located in Austria, Belgium, England, France, Germany, Hungary, Italy, the Netherlands, Poland, Scotland, and Ukraine, provide European and multinational customers with design, manufacturing and after-market services to satisfy their local market consumption requirements. Our Asian facilities, located in China, India, Japan, Malaysia, Singapore, and Taiwan, enable us to provide local manufacturing and design services and a more competitive cost structure in the Asian market; and serve as a low cost manufacturing source for new and existing customers in the global market. Our Latin American facilities, located in Mexico, enable us to provide a low cost manufacturing source for new and existing customers. Our Latin American facilities, located in Brazil, provide customers with manufacturing and after-market services to satisfy their local market consumption requirements. See “Risk Factors – We derive a substantial portion of our revenue from our international operations, which may be subject to a number of risks and often require more management time and expense to achieve profitability than our domestic operations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Financial Information about Business Segments We have identified our global presence as a key to assessing our business performance. While the services provided, the manufacturing process, the class of customers and the order fulfillment process is similar across manufacturing locations, we evaluate our business performance on a geographic basis. Accordingly, our reportable operating segments consist of three geographic regions – the Americas, Europe, and Asia – to reflect how we manage our business. We have also created a separate segment for our service groups, independent of our geographic region segments. See Note 14 – “Concentration of Risk and Segment Data” to the Consolidated Financial Statements. Competition Our business is highly competitive. We compete against numerous domestic and international electronic manufacturing services and design providers, including Benchmark Electronics, Inc., Celestica, Inc., Flextronics International, Hon-Hai Precision Industry Co., Ltd., Plexus Corp., Sanmina – SCI Corporation and Solectron Corporation. In addition, we may in the future encounter competition from other large electronic manufacturers and manufacturers that are focused solely on design and manufacturing services, that are selling, or may begin to sell the same services. Most of our competitors have international operations, significant financial resources and some have substantially greater manufacturing, RD, and marketing resources than we do. We also face competition from the manufacturing operations of our current and potential customers, who are continually evaluating the merits of manufacturing products internally against the advantages of outsourcing. We believe that the primary basis of competition in our targeted markets is manufacturing capability, price, manufacturing quality, advanced manufacturing technology, design expertise, time-to-volume production, 12
  27. 27. reliable delivery, and regionally dispersed manufacturing. Management believes we currently compete favorably with respect to these factors. See “Risk Factors – We compete with numerous other electronic manufacturing services and design providers and others, including our current and potential customers who may decide to manufacture all of their products internally.” Backlog Our order backlog at August 31, 2006 was approximately $3.1 billion, compared to backlog of $2.3 billion at August 31, 2005. Although our backlog consists of firm purchase orders, the level of backlog at any particular time is not necessarily indicative of future sales. Given the nature of our relationships with our customers, we frequently allow our customers to cancel or reschedule deliveries, and therefore, backlog is not a meaningful indicator of future financial results. Although we may seek to negotiate fees to cover the costs of such cancellations or rescheduling, we may not always be successful in such negotiations. See “Risk Factors – Most of our customers do not commit to long-term production schedules, which makes it difficult for us to schedule production and achieve maximum efficiency of our manufacturing capacity.” Seasonality Production levels for our consumer and automotive industry sectors are subject to seasonal influences. We may realize greater net revenue during our first fiscal quarter due to high demand for consumer products during the holiday selling season. Components Procurement We procure components from a broad group of suppliers, determined on an assembly-by-assembly basis. Almost all of the products we manufacture require one or more components that are available from only a single source. Some of these components are allocated from time to time in response to supply shortages. We attempt to ensure continuity of supply of these components. In cases where unanticipated customer demand or supply shortages occur, we attempt to arrange for alternative sources of supply, where available, or defer planned production to meet the anticipated availability of the critical component. In some cases, supply shortages may substantially curtail production of assemblies using a particular component. In addition, at various times there have been industry-wide shortages of electronic components, particularly of memory and logic devices. Such shortages have produced insignificant levels of short-term interruption of our operations, but we cannot assure you that such shortages, if any, will not have a material adverse effect on our results of operations in the future. See “Risk Factors – We depend on a limited number of suppliers for components that are critical to our manufacturing processes. A shortage of these components or an increase in their price could interrupt our operations and reduce our profits.” Proprietary Rights We regard our manufacturing processes and electronic designs as proprietary intellectual property. To protect our proprietary rights, we rely largely upon a combination of trade secret laws; non-disclosure agreements with our customers, employees, and suppliers; our internal security systems; confidentiality procedures and employee confidentiality agreements. Although we take steps to protect our intellectual property, misappropriation may still occur. Historically, patents have not played a significant role in the protection of our proprietary rights. Nevertheless, we currently have a relatively modest but growing number of solely owned and jointly held patents in various technology areas, and we believe that our evolving business practices and industry trends may result in continued growth of our patent portfolio and its importance to us, particularly as we expand our business activities. Other important factors include the knowledge and experience of our management and personnel and our ability to develop, enhance and market manufacturing services. We license some technology and intellectual property rights from third parties that we use in providing manufacturing and design services to our customers. We believe that such licenses are generally available on 13
  28. 28. commercial terms from a number of licensors. Generally, the agreements governing such technology and intellectual property rights grant us non-exclusive, worldwide licenses with respect to the subject technology and terminate upon a material breach by us. We believe that our electronic designs and manufacturing processes do not infringe on the proprietary rights of third parties. However, if third parties assert valid infringement claims against us with respect to past, current or future designs or processes, we could be required to enter into an expensive royalty arrangement, develop non-infringing designs or processes, or engage in costly litigation. See “Risk Factors – We may not be able to maintain our engineering, technological and manufacturing process expertise; The success of our turnkey activity depends in part on our ability to obtain, protect, and leverage intellectual property rights to our designs; and Intellectual property infringement claims against our customers or us could harm our business.” Employees As of April 10, 2007, we had approximately 74,000 full-time employees, compared to approximately 40,000 full-time employees at October 17, 2005. The increase in the number of employees is due to acquisitions consummated in fiscal year 2006, the subsequent merger with Taiwan Green Point Enterprises Co. Ltd (“Green Point”) and the addition of employees to satisfy increased customer demand requirements. See Note 17 – “Subsequent Events” to the Consolidated Financial Statements for discussion surrounding the Green Point merger. None of our domestic employees are represented by a labor union. In certain international locations, our employees are represented by labor unions and by works councils. We have never experienced a significant work stoppage or strike and we believe that our employee relations are good. Geographic Information The information regarding net revenue; segment income and reconciliation of income before income taxes; and property, plant and equipment set forth in Note 14 – “Concentration of Risk and Segment Data” to the Consolidated Financial Statements, is hereby incorporated by reference into this Part I, Item 1. Environmental We are subject to a variety of federal, state, local and foreign environmental regulations that relate to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process, or that require design changes to and recycling of products we manufacture. We believe that we are currently in substantial compliance with all material environmental regulations. However, from time to time, new regulations are enacted, such as two relatively recently enacted European Union directives, and it can be difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with such regulations as they are enacted. Any failure to comply with present and future regulations could subject us to future liabilities, the suspension of production or a prohibition on the sale of products we manufacture. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expense to comply with environmental regulations, including expenses associated with the recall of any non-compliant product. See “Risk Factors – Compliance or the failure to comply with current and future environmental regulations could cause us significant expense.” Executive Officers of the Registrant Executive officers are appointed by the Board of Directors and serve at the discretion of the Board. Each executive officer is a full-time employee of Jabil. There are no family relationships among our executive officers and directors. Forbes I.J. Alexander (age 46) was named Chief Financial Officer in September 2004. Alexander joined Jabil in 1993 as Controller of Jabil’s Scotland facility and was promoted to Assistant Treasurer in April 1996. Alexander was Treasurer from November 1996 to August 2004. Prior to joining Jabil, Alexander was 14